UNTIL DEBT DO US PART : the “weaponisation” of debt in family law financial proceedings
Secret or unknown debts often ‘come out in the wash’ in family law financial proceedings. So, what happens on separation if an ex-partner has incurred significant personal debt? Can one party be held liable for a debt that they were not responsible for creating?
Shockingly, the short answer is yes. Below we highlight some interesting issues to be aware of.
1. Australian woman ordered to pay $300,000 of tax debt incurred by ex-partner
A recent article published was in commercial media which detailed the experience of one woman (given the alias of Millie) who was ordered by the Federal Circuit and Family Court of Australia (the Court) to sell her family home in order to pay over $300,000 of tax debt incurred by her ex-partner. Millie, told the reporter that: –
“By assigning his debt [to me], including fines, interest, and penalties, the Courts effectively deemed it my responsibility as his de facto partner to manage not only his affairs, but also his dishonest behaviour.”
As shocking as this result may seem, the Court has a wide discretion when determining a property settlement and was empowered to do so by the Family Law Act 1975 (Cth) (the Act).
The article reports that relevant to the Court’s decision, was evidence that Millie was aware of her ex-partners debt because she had helped him prepare a letter to the ATO regarding the tax debt. Millie however maintained that her ex de facto partner had told her he had paid off the debt years before.
To assist in understanding how the Court could reach such an outcome, the role of these considerations in making a family law financial order are discussed below.
2. Understanding the process of family law financial proceedings
To understand the role of debt in family law financial proceedings, it is first important to understand the process followed by the Court in making a family law financial Order (The Court uses a “4 Step” Process): –
a. Property pool: Identify and value all current property of the parties including all assets and liabilities in their sole or joint names, regardless of how or when it was acquired (the Property Pool).
b. Contributions: consider financial and non-financial contributions of each party to the relationship and the property pool. There are two methods adopted by the Court in assessing the contributions of each party
i. The global approach: this is the more common approach wherein the Court assesses the parties’ contributions to the property pool as a whole; or
ii. The asset-by-asset approach: this involves the Court assessing each parties’ contributions to each individual asset and liability of the property pool. this approach is less common, however may be appropriate in cases involving shorter relationships and/or small property pools.
c. Future needs: consider the future needs of each party by reference to factors including age, capacity to earn an income, health, care of children etc.
d. Just and equitable: consider first whether it is just and equitable for an adjustment of property to occur and then consider what outcome is just and equitable in all the circumstances.
3. The role of debt in family law financial proceedings
a. Application of the steps
Applying the general approach of the Court, any current debt held in the sole name or joint names of the parties will be included in the property pool. This may include debt incurred after separation.
The property pool will then be adjusted between the parties according to the Court’s assessment of each parties’ contributions, future needs, and what the Court considers is a just and equitable outcome. In circumstances where there is significant debt incurred by one party, it may be more appropriate for the Court to adopt an asset-by-asset approach.
b. Power to transfer debt
Tax debt can be legally transferred from one party to another in family law financial proceedings.
The High Court of Australia has held that the Court has power to direct Commissioner of Taxation to substitute one party to a marital or de facto relationship for another in relation to tax debt.
Meaning, that in family law financial proceedings, if the Husband has incurred a tax debt of $10,000 in his personal name, it is within the scope of the Court’s power to make an order binding the Commission of Taxation to transfer this debt into the sole name of the Wife.
c. Worked example
For example: Sally and Ben separate after 15 years of marriage. Their contributions and future needs are likely to be assessed as equal. Ben discloses that he has an unpaid tax debt of $20,000.
Relevant considerations of the Court are likely to be as follows: –
a. at what stage in the relationship the debt was incurred, specifically whether it was incurred after separation;
b. whether Sally was aware of Ben’s unpaid tax debt;
c. whether Sally benefited from the unpaid tax debt, by way of the funds which should have been used to pay the debt instead being applied to joint living expenses;
d. whether the debt impact’s Ben’s future needs.
The Court has a wide discretion under the Act to make a determination as to the property settlement. Possible outcomes are as follows: –
1. If the tax debt was incurred over several years during the relationship, Sally was aware of the tax debt, and derived some financial benefit from the unpaid debt, it is more likely that the Court will order that Sally be liable for some or all of the debt.
2. If the debt was incurred after separation or very late in the relationship without Sally’s knowledge it is more likely that the Court will Order that Sally is not liable for the debt.
Importantly, each case will be decided on its own merits according to the Court’s assessment of the evidence as to contributions and future needs.
4. The role of debt and family violence
The overarching concern arising from the current legislative scheme is that a perpetrator of family violence may accumulate debt, without the knowledge or consent of their current or former partner with the intention of perpetrating financial control and/or manipulating family law financial proceedings.
Currently, the legislation does not specifically require a Court to consider the role of family violence in determining family law financial proceedings. It has been suggested that this leaves survivors of family violence unnecessarily vulnerable to acts of financial control.
5. Proposed amendments to the family law act
New legislative amendments are set to come into effect on 10 June 2025.
The amendments will require the Court to consider the effect of family violence in determining a property settlement as well as expressly capturing ‘economic or financial abuse’ within the definition of family violence.
Previously, it was open for the Court to consider the impact of family violence as an additional consideration, however there was no express requirement that a Court do so. This should “balance” the books somewhat.
6. Protecting against hidden debt
In any family law financial matter, there is a risk that the other party may attempt to deal with property in a manner which ultimately reduces your entitlement. If you are concerned that your ex-partner is adversely dealing with relationship property, including incurring unnecessary debts, you should speak to a family lawyer immediately to discuss how to best protect your interest and entitlements. We have the necessary experience to assist in this regard.
If you need assistance with any of the above, please don’t hesitate to give our office a call on 07 5526 0167 to speak with one of our highly qualified and experienced family lawyers or email [email protected].
